Spotify: A Time to Transition
Spotify has been trading wildly with the whims of the market, but behind the price, a positive story keeps building. Let’s check back in on Spotify.
The Long Term Vision
The ultimate vision for Spotify is simple. One billion users. Expanding markets (music => podcasts => audiobooks => video). Decent unit economics. Strong personalization. And an operator who accomplishes what they say they will.
Spotify will make money on scale to overcome the tougher unit economics.
The holy grail for Spotify would be a scaled ad network. Historically, Spotify has hit all of it’s objectives, but this is the one that got away. My ultimate bull case is where Spotify achieves this… it would be the true moat.
Spotify the Operator
I like to frame Spotify as an operator. They execute. The easiest way to understand this is to look at what Spotify has said they will accomplish versus what they have accomplished. The easiest way to track this is objectives set during investors days. During the first investors day in 2018, Spotify forecasted significant revenue growth, but with only generating free cash flow (but no profit). Spotify hit these goals, but the market was not impressed. The market didn’t think Spotify could deliver a profit.
Eventually, Spotify had their next investors day and they laid out their plan for profitability. At the time, these were audacious goals that were laughed at by many investors. Now, Spotify is on track to hit them, with a clear inflection point in margins.
The Age of AI
The question with everything is how will Spotify perform in the age of AI.
The easiest way to think off how AI will interact is that the cost of content creation will go down dramatically, raising the amount of supply of music. In theory, if the supply gets large enough, it could change the business of the labels.
No matter what happens, artists will fight AI music. I don’t quite buy the narrative that AI music will meaningfully change demand for music. Ultimately, supply doesn’t matter here if demand doesn’t change. Spotify has navigated these situations before and will again.
The Elephant in the Room
Spotify is firing on most cylinders right now, but they are in a time of change. Ek is transitioning out of the CEO role, while Spotify is transitioning into the AI era. Early indications are positive on all accounts.
Ek transitioning and Spotify announcing its next Investor Day to unveil the company’s “next chapter” has me reflecting on the past.
The question I keep coming back to is simple: will the next four years be as strong as the last four?
